Bayside to become Jackson Hewitt's majority owner

PegBrickley

Investor and financier Bayside Capital is in line to be "a significant majority" owner of Jackson Hewitt Tax Service Inc.
JHTXQ
after the beaten-up tax preparer gets through its Chapter 11 restructuring, an attorney for Jackson Hewitt told a bankruptcy judge Wednesday.

An investment firm with $4.5 billion under management, Bayside led the talks that produced a prearranged Chapter 11 plan proposal for Jackson Hewitt, the attorney, Mark McDermott, said at a hearing in the U.S. Bankruptcy Court in Wilmington, Del.

Bayside is the largest of 10 secured lenders that Jackson Hewitt owes a total of $357 million. With a big interest payment looming, the company agreed to allow secured lenders to wrest equity out of the hands of public shareholders in partial payment of what they are owed.

The shareholder squeeze-out is built into the Parsippany, N.J., company's proposed Chapter 11 plan, which the company hopes to put in place within months. Jackson Hewitt's stock has been trading in penny territory, as the market caught on that the country's second-largest tax preparer was in trouble, McDermott said.

Worth an estimated $225 million, Jackson Hewitt does not have sufficient value to cover the secured debt, said McDermott, who's with Skadden Arps Slate Meagher & Flom. Secured lenders are getting new loans, as well as equity, under the proposed plan.

"The banks are vastly underwater here," McDermott told Judge Mary Walrath at the debut session in the Chapter 11 case that was filed Tuesday. Walrath signed off on preliminary orders authorizing Jackson Hewitt to pay employees, honor obligations to the franchisees that account for most of its business, and take other necessary steps to continue operations as usual while the balance sheet is revamped.

She set a July 8 court date to consider confirmation of Jackson Hewitt's Chapter 11 plan, which already has votes of support from most secured lenders. Unsecured creditors and shareholders, who stand to be wiped out, won't get a vote under the company's reorganization strategy.

Jackson Hewitt is in talks with Wal-Mart Stores Inc.
WMT, -0.37%
to renew an exclusive arrangement that gives it kiosk space in 2,000 stores, accounting for a sizeable chunk of the tax preparation business, McDermott said.

Besides trade creditors and landlords whose leases are being dropped, unsecured creditors include potentially "millions" of people who signed up for refund-anticipation loans from Jackson Hewitt, according to McDermott.

Last year, the short-term, high-interest rate loans and similar products accounted for 22% of Jackson Hewitt's revenue, court documents say. The loans gave tax filers fast access to cash they expect to collect from refunds, and providers had the safety of knowing they would be paid.

Consumer advocates have long attacked refund-anticipation loans, or RALS, as predatory, aimed at unsophisticated people unaware they were paying steep prices to borrow their own money.

"The loans were such a big drain on the taxpayers' liquidity, and not just any taxpayers. It was the most vulnerable consumers who signed up for them," said Chi Chi Wu, staff attorney with the National Consumer Law Center. An Internal Revenue Service decision last summer essentially ended refund-anticipation loans as a risk-free proposition, Wu said. Bowing to years of pressure from consumer groups, the IRS agreed to stop issuing indications when tax returns were subject to seizure due to unpaid child support, student loan troubles or back taxes owed.

Unable to be certain they'll be able to collect out of the refund, many lenders dropped out of the business, or were pushed out by regulators worried about risky loans.

"It looks like RALS are gone," Wu said in an interview Wednesday.

In the meantime, however, Jackson Hewitt is left with a legacy of lawsuits over the loans, featuring claims it ran afoul of consumer protection laws. The company intends to use Chapter 11 to shake off the legal trouble, McDermott said.

A broad program to give notice that Jackson Hewitt's Chapter 11 plan includes provisions cutting off consumer lawsuits over the refund-anticipation loans is being launched as part of the restructuring.

Anyone who feels they have a complaint can weigh in with the court. They won't get paid, anyway, McDermott said, because they will be at the bottom of the heap, with other unsecured creditors and shareholders who are getting nothing under the plan.

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